Reviewing Block Grants for Medicaid: TennCare III

On January 8, 2021, Tennessee became the first state to undertake block grant funding for its Medicaid program. Entitled “TennCare III” and approved by the Centers for Medicare and Medicaid (CMS) as a Section 1115 waiver, Tennessee’s block grant caps federal funding for Medicaid programs, instead of the traditional open-ended matching of state funds. Lauded by the Trump administration as a means of delivering more efficient health care but met with concern from patient and physician advocacy groups, including SGIM, wanting to preserve patient access, block grants are a controversial policy tool to refashion Medicaid financing. It is vital for internists to be familiar with this important policy debate, as block grants for Medicaid have important consequences for health equity, access, and caring for a complex, low income population. In this article, we further describe block grants and highlight the main arguments for and against them. The authors adapted content from a Leadership in Health Policy Program (LEAHP) Journal Club for this article.

Background

Medicaid is a public health insurance program that covers nearly 79 million low-income Americans representing nearly 1 in 4 Americans. Medicaid accounted for 16% of national health expenditures in 2019, and at the state level accounted for, on average, 29% of state budgets.¹ Medicaid is jointly funded by individual states and the federal government. In the traditional open-ended arrangement, the federal government matches a state’s Medicaid spending using the Federal Medical Assistance Percentage (FMAP). The FMAP calculates the proportion of federal matching for each dollar each state spends on Medicaid, ranging from a statutory minimum of 50% to a maximum of 83%. The FMAP rate is based on each state’s average per capita income, so states with lower average incomes have a higher FMAP. The FMAP creates flexibility in Medicaid financing during times of increased program costs, either due to increased enrollment or increased beneficiary costs. This has important implications during economic downturns, such as during the COVID-19 pandemic, when enrollment historically increases, because federal funding increases proportionally.

There are federal statutory requirements for Medicaid. However, historically states have used Section 1115 waivers, which grant authority to the Health and Humans Services Secretary to approve demonstration projects, to individualize their Medicaid program outside of these requirements. Section 1115 waivered demonstrations need to promote the objectives of Medicaid and be federally budget neutral. They are typically approved for a 5-year period with the possibility of extension based on review of the program.

Under the Healthy Adult Opportunity program, the Trump administration has proposed using these waivers to authorize block grant programs. While Tennessee has used Section 1115 waivers to tailor its own Medicaid program since 1994, TennCare III marks the first time any state has sought to employ a block grant structure.

Block Grants

Block grants differ from traditional Medicaid financing. States with Medicaid programs funded through block grants would no longer receive open-ended matched funding from the federal government based on the FMAP. Instead, they would be allocated a fixed amount of federal funds (either in aggregate or on a per capita basis) to cover their Medicaid program. Because federal funds are capped, the state would assume more financial risk. Although states would be responsible for higher costs of their Medicaid program, they have the potential to share in savings from lower costs.

Block Grants Through TennCare III—A First in the Nation

TennCare III—Tennessee’s Section 1115 waiver—follows an aggregate block grant structure, approved for an unprecedented 10-year period.² It also contains the following unique features:

1. an aggregate cap, which is subject to change if enrollment changes more than 1% from base year enrollment;
2. value-based savings, where the state would be eligible for up to 55% of any savings pending meeting yet to be defined performance metrics, which must be reinvested in state health programs;
3. increased flexibility to add coverage and benefits without approval from the Centers for Medicare and Medicaid Services (CMS), but not to restrict benefits or reduce coverage;
4. a commercial-style, closed drug formulary; and
5. state control over the amount of uncompensated care funding for hospitals.

Argument for Block Grants—The Ten-thousand-foot View

Support for block grants like TennCare III fall under fiscal and programmatic design arguments that favor value-based care and increased flexibility to improve health outcomes for low-income Americans. As argued by former CMS Administrator Seema Verma, the sustainability of Medicaid programs has been a concern, placing state budgets under increasing stress at the risk of “crowding out other priorities like public safety and education,” without clearly defined improvement in health outcomes.³ There are also concerns regarding inflexible federal Medicaid mandates which limit “routine or innovative” changes to individual state’s programs. In removing these limitations, block grants are a proposed solution to curtail rising Medicaid costs “by giving states unprecedented flexibility” in program design in exchange for greater accountability for managing Medicaid, which ultimately “aligns financial incentives to improve quality of care and health outcomes.”

Many of the same arguments for block grants have been highlighted in Tennessee. The Tennessee Department of Health has itself argued that the opportunity for savings given the ‘successful management of its Medicaid program’ can be reinvested to improve the health of TennCare members, and the improved flexibility for Tennessee to operate its own Medicaid program. Additionally, Tennessee’s administration contends that block grants will not lead to reductions in populations served, benefits, quality, or provider rates.

Arguments Against Block Grants—Preserving Health Care for Low-Income Americans

Block grants have drawn criticism from patient and physician groups, as well as health policy experts, concerned about whether block grants fulfill the overall mission of Medicaid. Physician based organizations, such as Society of General Internal Medicine and the American College of Physicians, argue that block grants have the potential to reduce access and healthcare benefits to low-income Americans, cap program benefits, reduce provider payments, or increase cost sharing—all of which limit Medicaid’s fundamental role as a critical safety net program caring for complex and vulnerable populations.^{4, 5} Furthermore, block grants undermine the healthcare of low-income Americans at times of increased financial hardship, such as during the COVID-19 pandemic, by reducing Medicaid’s ability to expand coverage.

Future Direction: Reversed Under a New Administration?

To date, no further action regarding block grants has occurred. While future block grant Section 1115 waivers are unlikely to be approved, the Biden administration has not yet walked back TennCare III, unlike work requirements for Medicaid eligibility, another key policy during the Trump administration. TennCare III’s fate could also be determined in the courts as experts determine whether block grants are allowed under Section 1115 demonstration waivers. Health policy experts continue to watch this space and its impact on vulnerable populations. However, as internists concerned about the health equity implications of providing high quality care to low-income Americans, we recommend SGIM advocate to CMS for TennCare III’s rescindment. We also recommend that internists in Tennessee advocate for legislation that would increase access to health care and reduce health disparities, such as Medicaid expansion. Block grants for Medicaid may lead to savings, but they have the potential to cause irreparable harm to the health of vulnerable residents of Tennessee.